An Appetite For Growth

AN APPETITE FOR GROWTH

KRBL

KRBL Ltd (KRBL), which was established in 1889, is India’s first integrated rice company with a comprehensive product chain. The company is engaged in seed development, contact farming, procurement of paddy, storage, processing, packaging, branding and marketing of Basmati rice. The company is India’s first fully-integrated and scalable rice company having two rice processing plants with manufacturing capacity of 195 MT/hr.

The company's operating segments include agri, which includes agricultural commodities, such as rice, Furfural, seed, bran and bran oil, among others, and energy, which includes power generation from wind turbine, husk-based power plant and solar power plant.

 Domestically, its products are available pan-India and it exports to 75 countries, including Saudi Arabia, the United Arab Emirates, Iraq, Kuwait and Qatar. The contribution of international business increased from 35 per cent in FY17 to 40 per cent in FY18, whereas the domestic contribution came down from 65 per cent in FY17 to 60 per cent in FY18. Its flagship brand, India Gate is recognised both in India and abroad with strong presence and impressive market share. It also owns other brands such as Taj Mahal, Doon, Nur Jahan. 

Basmati Rice Industry

As per ICRA estimates, Indian Basmati rice exports are expected to post strong growth in FY18 and FY19 on the back of improved demand in the international market and transference of higher paddy prices over the last two procurement seasons. Indian basmati rice exports have witnessed strong revival in FY18 with 22 per cent growth in value in 9M FY18 over the previous fiscal, after having been on the downward trajectory over FY15 to FY17. The momentum is likely to fuel the industry growth in FY19 as well. The concern, however, is that the export volumes have largely remained stagnant in line with the last few years. 

Diversifying into premium health foods The company is diversifying by including health foods in its product portfolio. KRBL has launched new product 'India Gate Quinoa', which would cater to both domestic and international market under the 'wholesome grain' segment. The company looks to promote health foods like brown rice and Quinoa through digital advertising targeting upper society consumers. This segment requires less capex but high R&D and marketing expenses and has higher margins.

According to rating agency ICRA, Iran and Saudi Arabia account for nearly 40 to 45 per cent of India’s Basmati rice exports. The US President Donald Trump abandoned the landmark 2015 nuclear deal between America and Iran, and reinstated sanctions, opening an uncertain new chapter for the country and its neighbours. KRBL gets 5 per cent of its turnover from Iran. However, KRBL is not overly worried as the company feels that rice is a staple food in Iran and it will be out of the sanctions, since in the past too, whenever there were sanctions on North Korea, Sudan etc, essential food items were left out of the sanctions. 

The KRBL group has reportedly shown interest in REI Agro, a firm having about 20 per cent share in the world’s Basmati rice market, and has gone into liquidation in accordance with the National Company Law Tribunal (NCLT) order. Also, recently, the National AntiProfiteering Authority (NAA) has dismissed charges against KRBL of not passing on price reduction benefits under Goods and Services Tax (GST) to consumers. This is the second time in a row that the NAA has ruled in favour of the company against whom a complaint was filed for indulging in profiteering. 

On the financial front, KRBL’s consolidated revenue in Q4 FY18 declined by 3.6 per cent to Rs 881 crore as against Rs 914 crore during the same period previous year. The EBITDA for the quarter stood at Rs 210 crore, increasing 18.15 per cent over the same period previous year on account of lower raw material costs. Its EBITDA margin stood at 23.78 per cent as against 19.40 per cent for same period last year. The company’s profit before tax for Q4 FY18 was Rs 162 crore as against Rs 159 crore for the same period last year. However, the higher interest cost and tax outgo led to a decline in its profit after tax for the quarter to Rs 95 crore from Rs 109 crore in Q4 FY17. The PAT margin for the quarter stood at 10.91 per cent. The earnings per share for Q4 FY18 stood at Rs 4.05 as against Rs 4.64 for same period previous year. 

The company’s agri segment’s revenue declined by 3.9 per cent YoY, however, the EBIT margin of the segment improved by 482 bps YoY. On the other hand, KRBL’s energy segment reported revenue growth of 10.9 per cent with 756 bps expansion in EBIT margin. The Interest cost for the company shot up to Rs 31.5 crore as against Rs 1.4 crore in the same quarter last year. The tax rate for the quarter stood at 41 per cent. 

On an annual basis, the company’s consolidated revenues grew by 3 per cent to Rs 3264 crore in FY18 on account of better price realisation of rice both in domestic and international markets and higher income from power, Furfural oil and glucose business. The company reported its highest ever EBITDA of Rs 792 crore, an increase of 21 per cent over the previous fiscal. Its EBITDA margin stood at 24.27 per cent in FY18 as against 20.70 per cent in FY17 due to strong brand image and better cost controls. The company’s material cost came down from 70.83 per cent in FY17 to 66.81 per cent in FY18. Its profit before tax grew by 22 per cent to Rs 655 crore in FY18. 

The company reported its highest ever profit after tax of Rs 435 crore, witnessing an increase of 9 per cent over FY17. Its PAT margin for the quarter stood at 13 per cent. The company’s earnings per share increased from Rs 16.97 per share in FY 17 to Rs 18.46 per share in FY18. The company’s income from sale of electricity increased by 26 per cent in FY18 on account of higher generation due to first full-year operation of 27.3 MW wind power plant in Gujarat commissioned in FY17. The company’s total revenue, on account of sale of Furfural and Furfural alcohol, increased by 124 per cent in FY18 on account of first full-year operation of Furfural oil plant, which was commissioned in FY17. The company’s revenue from glucose business increased by 89 per cent on account of higher production of glucose during the year.

On the valuation front, the company maintained a PE ratio of 26.59x and debt-to-equity ratio is 0.57x. The company’s return on equity (RoE) and return on capital employed (RoCE) stood at 23.46 per cent and 21.44 per cent, respectively. The company’s five year revenue grew at a CAGR of 9 per cent, whereas its five Year EBIDTA increased at a CAGR of 21 per cent. 

Considering the company’s foray into premium health foods segment and now with the impact of GST getting normalised as also the changes in consumer preference towards branded Basmati rice in domestic market, we recommend our reader-investors to HOLD the stock.